LEGG MASON ALL CAP BLEND PORTFOLIOS (MDA 0)

Transcription

1 1Q 2018 Separately Managed Accounts LEGG MASON ALL CAP BLEND PORTFOLIOS (MDA 0) INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 Introduction Legg Mason Underlying strategies in proposed portfolio Legg Mason All Cap Blend Portfolios 50% ClearBridge All Cap Portfolios 50% ClearBridge All Cap Portfolios 2

3 Introduction Legg Mason Meet our investment managers Having honed their expertise over many decades and market cycles, our global asset managers offer specialized capabilities across a scope of asset classes and strategies Each skilled team operates with independent vision to help deliver powerful financial solutions for both individuals and institutions Investing with conviction Acting with conviction and discipline, we look beyond short-term, conventional thinking to rigorously pursue long-term value across differentiated fixed income, equity, and alternative solutions Real estate investment specialists Clarion Partners is a leading private equity and debt real estate investment manager established in 1982 Clarion invests in the Americas across a broad range of property types and risk profiles, with the goal of consistently creating value for its clients Quality-focused equity Global investment manager with over 50 years of experience and long-tenured portfolio managers who seek to build income, high active share or low volatility portfolios Global alternative investments One of the world s largest hedge fund investors, recognized as a global leader in structuring comprehensive alternative investment strategies for institutional and high net worth clients Active equity specialists An active equity specialist that builds global, stock-driven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships Systematic investment solutions QS Investors is a quantitative asset manager that provides multi-asset class and global equity solutions Their approach unites intellectual and academic precision with the power of data and technology in their quest to elevate the certainty of outcomes they deliver Global listed infrastructure investing RARE is a dedicated infrastructure investment manager focused on global listed infrastructure investments Established in 2006, RARE has grown to become one of the largest listed infrastructure managers globally Small-cap equity Known for its disciplined, valueoriented approach to managing small-caps An asset class pioneer, the firm s founder is one of the longest-tenured active managers income One of the world s leading global fixed income managers Founded in 1971, the firm is known for team management, proprietary research and a long-term fundamental value approach Active share is a measure of the percentage of stock holdings in a manager s portfolio that differs from the benchmark index 3

4 Introduction Multiple Discipline Account Multiple Discipline Account ( MDA ) -- Potential benefits Diversification Multiple investment styles in single account Ongoing monitoring of asset allocation with rebalancing as deemed appropriate 1 Simplified, convenient portfolio administration Single point of contact for portfolio management Consolidation of positions into one statement Flexibility and choice Greater accommodation of special instructions Tax harvesting potential 2 Diversification does not assure a profit or protect against market loss Asset Allocation does not assure a profit or protect against market loss 1 The Overlay Portfolio Management process is conducted by the MDA style managers and a service provider on behalf of Legg Mason Private Portfolio Group, LLC 2 Depends on individual tax situation Please see Disclaimer for important tax information 4

5 Introduction Multiple Discipline Account Diversification By investing in more than one asset class, investors may have the potential over time to enhance overall portfolio returns and manage risk Calendar year returns of varied market indices BEST PERFORMANCE WORST PERFORMANCE % 170% % 4603% 4271% 3917% 3807% 3003% 2975% 2869% 467% 107% 2371% 2225% 2070% 1649% 1548% 1431% 1088% 630% 419% 124% The above table is presented for informational purposes only and does not represent performance of any portfolio or mutual fund Past performance is no guarantee of future results Please see Performance End Notes for important additional information An investor cannot invest directly in an index is represented by the FTSE 3-Month US Treasury Bill is represented by the Bloomberg Barclays US Government/Credit Bond 300% 237% 476% 378% 1181% 1163% 1143% 723% 705% 549% 474% -017% -142% -978% 570% 180% is represented by the Russell 1000 is represented by the Russell % 3721% 1402% 1265% 1210% 707% 526% 491% 471% 415% 2686% 2348% 2225% 2022% 1579% 1335% 1066% 907% -2892% -3685% -3700% -3844% -3844% -3854% -4306% -4432% 3447% 3421% 3246% 2646% 2058% 1969% 452% 016% 1851% 1805% 1790% 1751% 1600% 1581% 1526% 1459% 482% 2909% 2638% 2475% 2450% 1671% 1551% 1506% 821% 659% 013% 874% 264% 211% 039% 008% -138% -165% -291% -550% -1173% is represented by Russell MidCap is represented by Russell MidCap 007% 4330% 3574% 3452% 3348% 3346% 3253% 3239% 2329% 005% -235% 1475% 1369% 1345% 1305% 1190% 599% 560% 422% 003% -020% -039% -138% -383% -478% -747% -448% is represented by the Russell 2000 is represented by the Russell % 138% 015% 003% 3021% 2562% 2527% 2217% 2183% 1366% 1334% 784% 400% 3174% 2000% 1734% 1196% 1132% 733% 708% 305% 151% 027% -965% % -1552% -1566% -2210% -2741% -2788% -3026% 084% is represented by the MSCI EAFE The Broad Market is represented by the Source: Legg Mason As of 12/31/2017 Diversification does not assure a profit or protect against market loss All investments involve risks, including possible loss of principal Investing in non-us companies involves risks in addition to those ordinarily associated with investing in domestic securities, including the potentially negative effects of currency fluctuations, political and economic developments, foreign taxation and differences in auditing and other financial standards investing may not be suitable for everyone These risks are magnified in emerging markets Stocks of small- and mid-capitalization companies tend to involve more risk and volatility than stocks of larger companies As interest rates rise, bond prices fall reducing the value of fixed income investments See definitions slide for index definitions Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges 5

6 Introduction Multiple Discipline Account MDA Portfolios are designed to access multiple managers with compatible styles Multiple managers Single manager vs Unknown Styles Complementary portfolios Complementary Styles x4 Asset allocation Planned x4 Client reporting x1 x4 Portfolio review/re-balancing x1 x4 Manager firm selection x1 For illustrative purposes only MDA style allocations may be rebalanced to or toward the approximate target allocations when actual allocations vary from these targets Rebalancing is generally done with the investment manager s approval 6

7 Your investment portfolio All Cap ClearBridge All Cap Portfolios Overview ClearBridge All Cap Portfolios (ACG) seeks long-term capital appreciation through investment in large-, mid-, and small- capitalization stocks that have the potential for above average long-term earnings and/or cash flow growth Portfolio positioning Core growth option, which can be complemented by other investments or asset classes for further diversification Designed for investors looking for a growth portfolio that invests across multiple market capitalizations with a buy-and-hold strategy This strategy does not force buy or sell decisions based on market capitalization The potential result may be reduced portfolio turnover over time Key differentiators The strategy combines the expertise of four seasoned portfolio managers High-conviction stock selection that offers potential for growth across market cycles Portfolio managers evaluate each position daily and may decide to invest portfolios gradually or all at once based on market conditions, valuations and/or factors they consider to be relevant Objectives The strategy seeks: Long-term capital appreciation Philosophy We believe that: Competitive returns may be achieved by investing in a diversified portfolio of large-, medium- and smallcapitalization stocks that have the potential for above-average long-term growth and returns An intensive, bottom-up investment process can help find inefficiently priced companies with strong fundamentals, incentive-driven management teams, dominant positions in niche markets, and/or goods and services customers are practically compelled to use Consistency in our investment process, research, performance and client service is the key to excellence Market, security and/or other investment considerations may result in higher turnover from time to time Risks: All investments involve risk, including loss of principal and there is no guarantee that investment objectives will be met In addition to investments in large-capitalization companies, investments may be made in speculative and/or small-cap and mid-cap companies which involve a higher degree of risk and volatility than investments in larger, more established companies In addition, because the investments may be concentrated in a limited number of industries and companies, the portfolios may involve heightened risk While most investments are in US companies, investments may also be made in ADRs and other securities of non-us companies in developed and emerging markets which involve risks in addition to those ordinarily associated with investing in domestic securities, including the potentially negative effects of currency fluctuation, political and economic developments, foreign taxation and differences in auditing and other financial standards These risks are magnified in emerging markets ACG portfolios invest primarily in large-capitalization stocks, investing much smaller portions of the portfolios in small- and mid-capitalization company stocks Diversification does not assure a profit or protect against market loss Market, security and/or other investment considerations may result in higher turnover from time to time Also, all capitalization ranges will not necessarily be represented in an individual account 7

8 Your investment portfolio All Cap ClearBridge All Cap Portfolios investment process Idea generation Identify companies with strong business models, capital structures and management teams, generally with market capitalizations of $3 billion or greater Fundamental analysis Determine valuation considering the size of a business s addressable market, free cash flow yield, P/E, EV/Sales 1, PEG Ratio,2 Identify key risks and potential downside Portfolio construction Actively select investments across the growth spectrum, allocated into three growth buckets (Cyclical, Stable and Select) with distinct risk/return characteristics Managers are willing to pay a premium for companies with sustainable growth characteristics and superior ROIC 3 Risk management/ Evaluation discipline Understand security level and portfolio level risks Actively review investment rationales, position sizes and diversification metrics 1 Enterprise--To- Sales (EV/Sales): A valuation measure that compares the enterprise value of a company to the company's sales EV/sales gives investors an idea of how much it costs to buy the company's sales Generally the lower the EV/sales the more attractive or undervalued the company is believed to be 2 Price/Earnings To PEG Ratio: A stock's price-to-earnings ratio divided by the growth rate of its earnings for a specified time period The price/earnings to growth (PEG) ratio is used to determine a stock's value while taking the company's earnings growth into account, and is considered to provide a more complete picture than the P/E ratio While a high P/E ratio may make a stock look like a good buy, factoring in the company's growth rate to get the stock's PEG ratio can tell a different story The lower the PEG ratio, the more the stock may be undervalued given its earnings performance 3 Return On Invested Capital (ROIC): A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments The return on invested capital measure gives a sense of how well a company is using its money to generate returns The investment process may change over time The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios There is no guarantee investment objectives will be achieved Actual allocation may vary 8

9 Your investment portfolio All Cap ClearBridge All Cap Portfolios Overview The ClearBridge All Cap Portfolios - headed by Sam Peters and Albert Grosman - focus on large-, midand small-capitalization stocks Objectives The strategy seeks: long-term capital growth Current income is a secondary consideration Portfolio positioning Designed for investors seeking a value portfolio, with the ability to invest in all market capitalizations Offers a long-term buy-and-hold strategy, which may reduce portfolio turnover Key differentiators Process Repeatable, proprietary process designed to form explicit variant perceptions relative to expectations embedded in the stock price Team Robust, frequent communication to surface diverse perspectives and to improve the questions we ask and the assumptions we make Portfolio Construction Diversification across industries, economic drivers and macroeconomic and quantitative factors to build a resilient portfolio that maximizes risk-adjusted returns and is able to outperform in a variety of market conditions Philosophy What we believe: The stock market is a complex adaptive system It dynamically aggregates the views of participants, providing assessments of investment value As such, markets broadly adjust quickly to reflect new information, making it challenging for information-driven investment strategies to earn excess returns Inefficiencies occur in markets Inefficiencies occur, particularly when diversity of thought breaks down (eg, investors panic or get greedy all at once), as well as when the time horizon extends beyond the market s often myopic frame To generate excess returns consistently, we must find and exploit these inefficiencies We do this through an explicit analysis of market expectations, compared with the expectations we have developed through our review of the company s economic returns, capital allocation and competitive strategy RISKS: All investments involve risk, including the loss of principal, and there is no guarantee that investment objectives will be met Investments may be made in small- and mid-cap companies, which involve a higher degree of risk and volatility than investments in large-cap companies While most investments are in US companies, investments may also be made in ADRs and other securities of non-us companies in developed and emerging markets which involve risks in addition to those ordinarily associated with investing in domestic securities, including the potentially negative effects of currency fluctuation, political and economic developments, foreign taxation and differences in auditing and other financial standards These risks are magnified in emerging markets The managers may sometimes hold significant portions of portfolio assets in cash equivalents while waiting for buying opportunities Diversification does not assure a profit or protect against market loss Managers seek to keep portfolio turnover low to allow for the positive compounding effect of dividends over time, although market, security and other investment considerations may cause turnover to be higher from time to time Also, all capitalization ranges will not necessarily be represented in an individual account 9

10 Your investment portfolio All Cap ClearBridge All Cap Portfolios investment process Discovery: Diversity Breakdowns and Embedded Expectations Look for diversity breakdowns: High-level industry trends and competitive strategy Quantitative screens covering multiple sources of return and risk Embedded expectations for growth, returns and investment needs Valuation: Probabilistic Analysis of Business and Variant Perception Valuation: Multiple analytical tools to understand drivers of business value Probabilistic Approach: Build scenario analysis and simulations to explore business value under different assumptions Variant Perception: Develop an explicit narrative of how investment case differs from embedded expectations Systematic Updating: Actively recalibrate model and probabilities based on new information Portfolio Construction: Balance of Risk and Return Bottom-up weighting decisions to maximize riskadjusted potential return across industries, economic drivers of returns, as well as macroeconomic and quantitative factor exposures relative to strategy s benchmark Robust team discussions help avoid individual behavioral biases: overconfidence, anchoring, loss aversion, framing effects, confirmation bias The investment process may change over time The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios There is no guarantee investment objectives will be achieved 10

11 Strategy characteristics & performance Equity Portfolio characteristics Equity Portfolio characteristics as of March 31, 2018 Market capitalization (%) Characteristics Portfolio Above $50B $25 - $50B $10 - $25B $3 - $10B 0 - $3B Portfolio Number of Holdings 138 Dividend Yield 146 Forecasted P/E Ratio -1 Year 1589 Price/Book Ratio 416 Long-Term EPS 1459 Weighted Median Market Capitalization 3966 Weighted Average Market Capitalization Source: FactSet Portfolio characteristics are based on a representative portfolio within the composite and are subject to change at any time Portfolio characteristics of individual client portfolios in the program may differ, sometimes significantly, from those shown above Please see Endnotes for additional information Please see appendix for term definitions P/E ratio Year 1 and Long-term EPS growth are provided by I/B/E/S, are inherently limited and should not be used as an indication of future performance Yields and dividends represent past performance and there is no guarantee they will continue to be paid 11

12 Strategy characteristics & performance Equity Portfolio characteristics Equity Portfolio characteristics as of March 31, 2018 Sector weightings (%) Information Technology 2349 Financials 1612 Health Care 1555 Consumer Discretionary 1115 Industrials 933 Energy 791 Consumer Staples 431 Real Estate 357 Materials 313 Utilities 156 Top Holdings Portfolio UnitedHealth Group Inc 252 Citigroup Inc 235 Wells Fargo & Co 223 Johnson & Johnson 218 Oracle Corp 217 Comcast Corp 193 Biogen Inc 192 Amazoncom Inc 176 Alphabet Inc 165 Synchrony Financial 164 Total 2035 Telecommunication Services Source: FactSet Sector weightings and holdings are based on a representative portofolio within the composite and are subject to change at any time Sector weightings and holdings of individual client portfolios in the program may differ, sometimes significantly, from those shown above This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors or securities listed and should not be used as a sole basis to make any investment decisions 12

13 Strategy characteristics & performance Performance Performance Calendar-year total returns gross and net of fees (%) ending December All Cap Blend (gross) All Cap Blend (net) Mix Annualized rates of return gross and net of fees (%) as of March 31, 2018 PRELIMINARY MTH QTR YTD 1-year 3-year 5-year 7-year 10-year 15-year All Cap Blend (gross) All Cap Blend (net) Mix The Mix consists of the following: 50% Russell 3000 and 50% Russell 3000 The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Past performance is no guarantee of future results YTD numbers are not annualized Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance Net performance includes the deduction of a 30% annual wrap fee, which is the maximum anticipated wrap fee for equity and balanced portfolios Actual fees may vary For fee schedules, contact your financial professional, or if you may enter into an agreement directly with Legg Mason Private Portfolio Group, LLC (LMPPG), refer to LMPPG s Form ADV disclosure document Returns reflect the reinvestment of dividends and other earnings Please see Performance Endnotes for additional important information regarding the portfolio s performance and for effects of fees Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs 13

14 Strategy characteristics & performance Performance Risk/return profile (%) Gross of fees (based on 10-year period ending March 31, 2018) Modern portfolio statistics as of March 31, 2018 Annualized rate of return (%) All Cap Blend Mix All Cap Blend (MDA 0) Mix Annualized return (%) Annualized standard deviation (%) Sharpe ratio Beta 106 N/A N/A Alpha 016 N/A N/A R-squared 097 N/A N/A Risk (% annualized standard deviation) The Mix consists of the following: 50% Russell 3000 and 50% Russell 3000 The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Past performance is no guarantee of future results Investments involve risk of loss Alpha, Beta, and R-squared are shown versus the Mix Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Please see appendix for term definitions Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance Actual fees may vary For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC ( LMPPG ), refer to LMPPG s Form ADV disclosure document Returns reflect the reinvestment of dividends and other earnings Please see Performance Endnotes for additional important information regarding the portfolio s performance and for effects of fees Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs 14

15 Strategy characteristics & performance Performance Up/Down market capture ratios (%) Gross of fees (based on 10-year period ending March 31, 2018) 2 All Cap Blend Mix Up 83 positive months Down 37 negative months The Mix consists of the following: 50% Russell 3000 and 50% Russell 3000 The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance Actual fees may vary For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC ( LMPPG ), refer to LMPPG s Form ADV disclosure document Please see appendix for term definitions Please see Performance Endnotes for additional important information regarding the portfolio s performance and for effects of fees Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs Past performance is no guarantee of future results 15

16 Strategy characteristics & performance Performance of $100,000 Gross of fees (based on 10-year period ending March 31, 2018) $300,000 All Cap Blend Mix $250,394 $264,965 $250,000 $200,000 $150,000 $100,000 $50,000 $ The Mix consists of the following: 50% Russell 3000 and 50% Russell 3000 For illustrative purposes only Assumes no withdrawals or contributions These statistics are based on gross-of-fees quarterly composite returns, were calculated assuming reinvestment of dividends and income, and take into account both realized and unrealized capital gains and losses Past performance is no guarantee of future results All investments involve risk, including the loss of principal Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance Actual fees may vary For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC ( LMPPG ), refer to LMPPG s Form ADV disclosure document Please see Performance Endnotes for additional important information regarding the portfolio s performance and for effects of fees Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs 16

17 Appendix Investment Management Team Investment management team Evan Bauman Managing Director, Portfolio Manager Industry since 1996 Firm since 1996 Duke University BS in Mathematics Peter Bourbeau Managing Director, Portfolio Manager Industry since 1991 Firm since 1991 Fordham University MBA University of Florida BSBA Richard Freeman Managing Director, Portfolio Manager Industry since 1976 Firm since 1983 New York University MBA in Finance Brooklyn College BS in Accounting Member of the ClearBridge Investments Operating/Investment Committee Shearson American Express Portfolio Manager of the Shearson Aggressive Fund Portfolio Manager of Mid/italization Portfolios Chemical Bank Vice President, Trusts and Investments Drexel Burnham Lambert Vice President, Research Margaret Vitrano Managing Director, Portfolio Manager Industry since 1996 Firm since 1997 University of Pennsylvania MBA in Finance Duke University BA in Public Policy studies and Art History Citigroup Research Analyst for consumer discretionary sector 17

18 Appendix Investment Management Team Investment management team Albert Grosman Managing Director, Portfolio Manager Industry since 1993 Firm since 2007 Columbia Business School MBA Emory University BBA in Business Administration Long Trail Investment Management - Equity Analyst Phinity Capital - Equity Analyst Cyllenius Capital Management (BlackRock Inc) - Equity Analyst Fidelity Management & Research - Portfolio Manager Sam Peters, CFA Managing Director, Portfolio Manager Member of the CFA Institute Industry since 1993 Firm since 2005 University of Chicago MBA College of William & Mary BA in Economics Fidelity Management & Research - Portfolio Manager, Health Care Sector Team Leader Samuel M Peters Investment Advisors - Founder Eppler, Guerin & Turner - Financial Consultant 18

19 Appendix Performance Endnotes Performance Endnotes Performance calculation Legg Mason All Cap Blend Portfolios composite performance has the approximate target allocation of the following investment styles: 50% ClearBridge All Cap and 50% ClearBridge All Cap The Mix is comprised of 50% Russell 3000 and 50% Russell 3000 indices, rebalanced monthly Unlike the indices included in the Mix, investment styles included in MDA portfolios are not automatically rebalanced each month Performance returns for periods prior to January 2006 are based on the performance of a composite of accounts from a formerly-affiliated sponsor channel, which represented an overwhelming majority of the strategy s retail assets under management during such periods Such pre-2006 returns were calculated on an equal-weighted basis where each portfolio contributed an equal weight to the resulting composite return regardless of its asset size Performance returns for periods subsequent to January 2006 are based on the composite performance of all discretionary retail managed accounts in the strategy Such post-2005 returns were calculated on an assetweighted basis where each portfolio contributed to the resulting composite return proportionately based on asset size Fees Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance Net performance includes the deduction of a 30% annual wrap fee, which is the maximum anticipated wrap fee for equity and balanced portfolios Actual fees may vary For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC ( LMPPG ), refer to LMPPG s Form ADV disclosure document Definitions The Russell 3000 measures the performance of those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values The Russell 3000 is composed of the 3,000 largest US companies based on total market capitalization, and represents the vast majority of the investable US market The Russell 3000 measures the performance of those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values The stocks in this index are also members of either the Russell 1000 or Russell 2000 indexes The is a capitalization-weighted, composite index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries The portfolio composition typically varies from that of the above-noted, unmanaged indices Past performance is no guarantee of future results 19

20 Appendix Definitions Definitions Definitions The Bloomberg Barclays US Government/Credit Bond tracks the performance of the overall bond market and is a broad measure of the performance of government and corporate fixed-rate debt issues FTSE 3-Month US Treasury Bill is an index based upon the average monthly yield of the 90-Day Treasury Bills Treasury bills are secured by the full faith and credit of the US Government and offer a fixed rate of return The MSCI EAFE (Europe, Australasia, Far East) is an unmanaged index of common stocks of companies located in Europe, Australasia and the Far East The MSCI World is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets The MSCI World ex US consists of the following 22 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and, the United Kingdom The Russell 1000 consists of the 1000 largest securities in the Russell 3000, and this large cap (market-oriented) index is highly correlated with the The Russell 1000 measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values (A priceto-book ratio is the price of a stock compared to the difference between a company s assets and liabilities) The Russell 1000 measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values The Russell 2000 is comprised of the 2,000 smallest companies in the Russell 3000 The Russell 2000 measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values The Russell 2000 measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values The Russell 3000 is comprised of the 3,000 largest US companies based on total market capitalization, and represents the vast majority of the investable US market The Russell 3000 measures the performance of those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values The Russell MidCap consists of the 800 smallest companies in the Russell 1000 as ranked by total market capitalization The Russell MidCap measures the performance of those Russell MidCap companies with higher price-to-book ratios and higher forecasted growth values The Russell MidCap measures the performance of those Russell MidCap companies with lower price-to-book ratios and lower forecasted growth values The stock are also members of the Russell 1000 The is a capitalization weighted, composite index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries The /FTSE is an index of stocks representing approximately half of the market capitalization of the stocks in the that, on a growth-value spectrum, have been identified as falling either wholly or partially within the value half of the spectrum based on a number of factors Until December 16, 2005, when Standard & Poor s changed both the name of the index and its calculation methodology, the index was called the / BARRA Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges 20

21 Appendix Term Definitions Definitions Term definitions Market Capitalization measures the number of outstanding common shares of a given corporation multiplied by the latest price per share Weighted Median Market Capitalization represents the value at which half the portfolio s market capitalization weight falls above and half falls below Weighted Average Market Capitalization represents the average value of the companies held in the portfolio When that figure is weighted, the impact of each company s capitalization on the overall average is proportional to the total market value of its shares Dividend Yield is determined by dividing a stock s annual dividends per share by the current market price per share Dividend yield is a financial ratio that shows how much a company pays out in dividends P/E (Year 1) is the previous day s closing price of the stock divided by the consensus earnings per share (EPS) of fiscal year 1 (FY1) provided by I/B/E/S Forecasts are inherently limited and should not be relied upon as indicators of future performance The Price-to-Book ratio (P/B) is a stock s price divided by the stock s per share book value Earnings Per Share (EPS) is the portion of a company s profit allocated to each outstanding share of a common stock The Sharpe Ratio is a risk-adjusted measure, calculated using standard deviation and excess return to determine reward per unit of risk The higher the Sharpe Ratio, the better the portfolio s historical adjusted performance Alpha is a measure of the difference between actual returns and expected performance, given the level of risk as measured by Beta, where Beta measures sensitivity to benchmark movements R-Squared measures the strength of the linear relationship between the portfolio and its benchmark R-squared at 10 implies perfect linear relationship and zero implies no relationship exists Standard Deviation is based on quarterly data Standard deviation is a measure of the variability of returns; the higher the standard deviation, the greater the range of performance (ie, volatility) The Capture Ratios measure a manager s composite performance relative to the benchmark, considering only those quarters that are either positive (Up) or negative (Down) for the benchmark An Up Market Capture Ratio greater than 10 indicates a manager who has outperformed the benchmark in the benchmark s positive quarters A Down Market Capture Ratio of less than 10 indicates a manager who has outperformed the relative benchmark in the benchmark s negative quarters 21

22 Brandywine Global Clarion Partners ClearBridge Investments EnTrustPermal Martin Currie QS Investors RARE Infrastructure Royce & Associates Western Asset Legg Mason is a leading global investment company committed to helping clients reach their financial goals through long-term, actively managed investment strategies A broad mix of equities, fixedincome, alternatives and cash strategies invested worldwide leggmasoncom A diverse family of specialized investment managers, each with its own independent approach to research and analysis Over a century of experience in identifying opportunities and delivering astute investment solutions to clients Separately Managed Accounts (SMAs) are investment services provided by Legg Mason Private Portfolio Group, LLC (LMPPG), a federally registered investment adviser Client portfolios are managed based on investment instructions or advice provided by one or more of the following Legg Mason-affiliated sub-advisers: ClearBridge Investments, LLC and Western Asset Management Company Management is implemented by LMPPG, the designated subadviser or, in the case of certain programs, the program sponsor or its designee Investments for the program(s) discussed herein are traded primarily in US markets and unless otherwise noted, equity and fixed income investments for such program(s) are primarily of US issuers In addition, unless otherwise noted, indexes referred to herein represent groups of securities that are issued primarily by US issuers IMPORTANT TAX INFORMATION: Legg Mason, Inc, its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations Tax-related statements, if any, may have been written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor Gross-of-fees performance results shown herein do not reflect deduction for investment management fees and transaction costs The performance of individual client accounts will vary and will be reduced by such fees and costs Please review the effect of fees and transaction costs on account performance with your financial professional Investments are not obligations of, and are not guaranteed by, LMPPG or any other Legg Mason, Inc affiliate or subsidiary; are not FDIC or government insured; and are subject to risks, including possible loss of the principal amount invested Professional money management may not be suitable for all investors Multiple Discipline Account is a registered service mark of Morgan Stanley Smith Barney, LLC ( MSSB ) and is used under license by Legg Mason Private Portfolio Group ( LMPPG ) LMPPG is not affiliated with MSSB Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC Legg Mason Investor Services, LLC and ClearBridge Investments are subsidiaries of Legg Mason, Inc FN SMA0004 PPG-Q118-V1